3. Size of business Flashcards
Problems with attempting to measure the size of a business
- There are several different ways of measuring business size. They often give different comparative results. A business might appear large by one measure but quite small by another.
- There is no internationally agreed definition of a small, medium or large business. However, the number of employees is often used to make this distinction
Different measures of business size
- Number of employees
This is the simplest measure. It is easy to understand. It is clear that a business employing many employees is likely to be large. However, there are problems. Some businesses only need to employ a few people even though they have invested a lot of capital in the business and achieve high annual sales
- Revenue ( sales turnover )
Revenue is often used as a measure of size, especially when comparing businesses in the same industry. It is less effective when comparing businesses in different industries because some might be engaged in high-value production, whilst others might be in low-value production. Revenue is needed to calculate market share.
- Captial employed
Generally, the larger the business enterprise, the greater the value of capital needed for long-term investment, or the greater the amount of capital employed.
- Market capitalisation
Market capitalisation can be used only for businesses that have shares quoted on the stock exchange (public limited companies). As share prices tend to change every day, this form of comparison is not a very stable one.
- Market share
Market share is a relative measure. If a firm has a high market share, it must be among the leaders in the industry and comparatively large. However, if the size of the total market is small, a high market share will not indicate a very large firm.
- Profit is not a measure of a business size, it is a measure of performance!
Whcih form of business measurement is best?
There is no best measure. The one that should be used depends on what needs to be established about the businesses being compared. This could depend on whether we are interested in absolute size or comparative size within an industry.
Economic benifits of a small businesses
- They are often run by dynamic entrepreneurs with new ideas for consumer goods and services.
This helps to create variety and consumer choice in the market - Create employment (usually high proportion of working population).
-
create competition for larger businesses. Without this competition, larger firms could exploit
consumers with high prices and poor service. - Supply specialist goods and services to important industries. This helps large business by outsorcing some tasks. By being able to adapt quickly to the changing needs of customers, small businesses can increase the competitiveness of the larger organisations (recruiting, research, tehchnical support, repair and maintence)
- The large businesses of the future are the small enterprises of today
- They might have lower average costs than larger ones. Wage rates may be less than the salaries paid in large organisations. Also, small businesses tend to have lower administration and management costs than large organisations. These cost benefits could be passed on to the consumer
Advantages of being small business
- can be managed and controlled by the owner(s) – little risk of losing control
- often able to adapt quickly to meet changing customer needs – especially if the owner deals directly with customers
- offer personal service to customers to help build customer loyalty
- can usually be started up and operated with low capital investment
Disadvantages of small business
- may have limited access to sources of finance
- the owner has to carry a large burden of responsibility and is usually unable to afford to employ specialist managers
- if the owner or important workers are absent/ill, other employees may not have the necessary skills to operate the business
- may not be diversified, so there is a greater risk of external change having a negative impact
- few opportunities for economies of scale – average costs could be high
Strengths of family businesses
- Commitment: The family owners often show dedication in seeing the business grow, prosper and be passed on to future generations. As a result, many family members identify with the company and have the incentive to work harder and re-invest part of their profits into the business to allow it to grow in the long term.
- Reliability and pride: Because the family name and reputation are associated with the products, they strive to maintain a good relationship with their stakeholders.
- Knowledge continuity: Families in business prioritise passing their knowledge, experience and skills to the next generation. Many family members become involved in the family business from a very young age. This increases their level of commitment and could provide them with the necessary tools to run their family business
Weaknesses of family business
-
Informality: Because most families run their
businesses themselves, there is usually little interest in setting clear and formal business practices and procedures. As the family and its business grow larger, this situation can lead to inefficiencies and internal conflicts - Tradition: There is quite often a reluctance to change systems and procedures, with family members preferring to continue to operate the business as it was run historically. Lack of innovation could be a consequence.
- Conflict: Problems within the family may reflect on the management of the business and make effective decisions less likely.
Why business want to grow?
- Increased profits – expanding the business and achieving higher sales is one way of becoming more profitable.
- Increased market share – this will give a business a higher market profile and greater bargaining power with both suppliers and retailers.
- Increased economies of scale.
- Increased power and status of the owners and directors. The opportunities to gain publicity or influence government policy will increase if the business controlled by the owners or directors is large and well known.
- Reduced risk of being a takeover target – a larger business may become too large a target for a potential predatory company
Horizontal Integration
* Advantages
- It eliminates one competitor
and increases market share
and power. - There may be increased
power over suppliers to
obtain lower prices. It will help to experience potential economies of scale. - There is scope for
rationalising production,
concentrating all output on
one site as opposed to two.
Horizontal Integration
- Consumers now have less choice and may have to pay higher prices.
- Workers may lose job security as a result of rationalisation:
- Suppliers may have to offer lower prices to the bigger integrated business
- It may lead to a monopoly investigation if the combined business exceeds certain market share limits.
Forward Vertical Integration
* Advantages
- The business is now able to **control the promotion and pricing **of its own products.
- It gives a secure outlet for the products of the business and may now exclude competitors’ products from retail outlets
- Workers may have greater job security because the business has secure outlets and there may be more varied
career opportunities.
Forward vertical Integration
* Disadvantages
- The business may lack experience in this sector of the industry – a successful manufacturer does not necessarily make a good retailer.
Backward Vertical Integration
* Advantages
- It gives control over quality, price and delivery times of supplies
- It encourages joint research and development into improved quality of components. So consumers may obtain improved quality and more innovative products.
- The business may now control supplies of materials to competitors.
- Workers may have more career opportunities.
Backward Vertical Integration
* Disadvantages
- The business may lack experience of managing a supplying company – a successful steel producer will not necessarily make a good manager of a coal mine.
- The supplying business may become complacent due to having a guaranteed customer.
